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. Last Updated: 07/27/2016

INSIDE FINANCE: 'Communist' Government Wields Pension Reform Ax

Russia inherited from the Soviet Union a vast system of a state pensions security. The principle of its construction was a very simple one. Enterprises invested their money in a Pension Fund, according to their employees' average wages.

On this platform, numerous systems of privileges and bonuses, depending on industry or geographic location, piled up; like the famous benefits for those in the far north.

From the very beginning of the market reforms, the Pension Fund lived under the constant threat of bankruptcy. Frail enterprises were unable to pay for the future pensions of their laborers and the fund's budget deficit became a permanent fixture. That forced the Pension Fund leadership to take credits from commercial banks, at hefty interest rates, rolling them over again and again to make interest payments and to pay pensions - building up a more sedate, not so sexy version of the treasury bill pyramids that the Finance Ministry was busy building.

Nevertheless, this debt pyramid was not the fund's riskiest endeavor as matters turned out. That title went to another scheme. A considerable part of the assets of state, as well as non-state, pension funds were invested in stocks. And we all know what happened to the value of those assets.

The government had begun to realize the need for changing the old system for pensions during the early 1990s. But reforming this area was the most dangerous step from the point of view of politicians. There are many pensioners, they are politically active, they vote, as a rule, for the left.

Most importantly - reform of the pension system would demand significant investments, for which there was never enough cash. For all these reasons, reforming pensions was always postponed.

Fast forward to 1998 and the debt defaults. The still unreformed pension funds lost not only their money but also their ability to invest any new money in reliable instruments providing a positive yield.

Worse was to come. In the almost nine months of the Primakov Cabinet's work, there was no indexing of pensions, while the ruble plummeted to a quarter of its value against the dollar. The most radical reform government could never dream of taking such liberties. In reality, the communist government has turned out to be tougher than the reformers with their incessant compromises.

As a result of the actions of Prime Minister Yevgeny Primakov and his First Deputy Prime Minister Yury Maslyukov, the average pension in March fell down to an unprecedented low - 65 percent of the minimum standard of living for pensioners. This is the lowest level over the whole of the post-1991 period. The average pension in May 1998 was 130 percent of the minimum standard of living, a level that turned out to be the peak for now.

Meanwhile, the results of the devaluation put the Pension Fund budget suddenly into balance. Payments are collected in "new prices," but paid out in "old prices." Nevertheless, the psychological phenomenon is that pensioners prefer to get a much smaller pension that is paid on a regular basis, than a bigger, but delayed payout. However, what today is acceptable may come to grief tomorrow.

In 1999, some specialists expect a further decrease of investments in the Pension Fund, thanks to the continued decline in wage levels.

So in the fourth quarter of 1998, the real average wage was 65 percent of the level a year earlier, while for January 1999 it was 60 percent of the level of January 1998.

Is there a way out from this situation? Former deputy labor minister Mikhail Dmitriev considers that a short-term fix could come through eliminating the differentiation of pensions - presumably until the resumption of some kind of economic growth.

Again, this is beyond the wildest dreams of reformers, who had cogitated about the need for eliminating the burden placed on the state by a differentiated pensions system that handed out excessive benefits to huge categories of people. But they had feared even to whisper such things in the halls of the State Duma. And now, as a result of inflation and the likely indexing of the minimum pensions, the liquidation of these differentiations will take place "automatically."

There is an unfortunate side to this. The Pension Fund is now wound down tight. If it should uncoil of its own accord, then the communists will be faced with a need for extremely difficult steps. For example, they may have to increase the age of qualification for pensions. For Russia this is set at 55 years for women and 60 years for men. Many feel this is already too late. But then, unpopular decisions are usually the province of unpragmatic politicians.

Irina Yasina was a Central Bank spokeswoman under former Central Bank chairman Sergei Dubinin.